Warren Buffett likes referring to the extent of a company’s enduring competitive advantages as being its “competitive moat”. The size of a company’s competitive moat does not stay constant over time; and good companies are constantly working at increasing the size of their competitive moats. Moats will deter competitors from entering the industry and reduce the success of those who decide to enter.

As such, the extent of a company’s competitive moat is one of the first things to look for.

Lowest Cost

In the vehicle insurance industry, people assume service is the same across companies, so select their insurer mostly based on price. The insurer with the lowest cost base therefore has a significant advantage; and if there’s an enduring reason why their cost base is the lowest, then it has an enduring competitive moat.

Stiff Regulatory Hurdles

And one needs to consider the probability of these hurdles being relaxed as creating competition is a natural direction in which regulators would want to move.

For example, it is difficult to get regulatory approval for a new waste landfill site. Often collection contracts are usually for many years, making it even harder for a competitor to enter the market.

Share of Mind

Via advertising and presence, some brands enjoy a substantial share of mind – like Nike, Apple and Coke. So long as they keep their advertising momentum going relative to competitors, they should continue to enjoy this share of mind. A risk is that cost of advertising increases in the future.

High Switching Costs

For example IBM and SAP are so embedded into business’s processes, that the costs of switching would be exorbitant.

Patents

But be aware that patents are relatively expenses (about R200,000 for a straight forward one) and even more expensive to enforce.

Network Effects

Where the value of the network depends on how many people are already using it. For example Facebook and Twitter increase in value as more people join.

First mover advantage

It prolongs an online shopping experience if one repeatedly has to fill in one’s credit card details. So, a company which already has those details and doesn’t require you to fill them in again, has an advantage. For example, Amazon has a huge library of credit card details.

Economies of Scale

Distribution network

As companies grow larger their distribution networks become more efficient. It’s cheaper per coke can to transport 1000 cans than 100 cans. Companies like Coca Cola, Wal-mart and Amazon have built up enviable distribution networks; with Amazon even creating and deploying robots to its warehouses. In fact, Amazon have no physical stores – they are pure distribution.

Buying power

Along with large scale comes buying power.

Low Cost Producer

Being the lowest cost producer is also often a function of economies of scale. An example is Bank of America, which has more ultra-low interest domestic deposits than any other bank (JP Morgan Chase comes second and Wells Fargo third).